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Investment Philosophy & Process

Karma’s Investment philosophy is shaped by three decades of stock market investing: The liberalization of the Indian economy, the “Mexican tequila crisis”, the first “dot-com” boom and bust, the Asian baht crisis, Russian ruble crisis, “the new moderation”, BRICs 1.0, the global financial crisis, the Euro zone crisis, and subsequent recovery in the developed world. In all of this, we are interested in what perseveres, what survives and emerges stronger, what generates enduring returns. If the Yin is volatility, then yang is extraordinary opportunities.

Our investment process is based on a combination of top-down and bottom-up stock selection: finding under-valued or over-valued ideas and determining reasons for re-rating or de-rating. We use proprietary research to generate original fundamental long and short ideas. The focus is on finding stocks with asymmetric risk-reward characteristics, and arbitraging valuation anomalies within sectors of the market. We often take contrarian views.

In each case, whether value or growth, we apply the valuation methodology based on the way the stock has previously been priced. We then ask ourselves why the valuation discrepancy exists and what factors would cause it to change. We analyze the fundamentals of the company and the ability of its management team to deliver our estimated scenario. We collaborate with a number of industry and market sources to derive the level of confidence we need to make our investment decision. We believe that our ability to gain, analyze and process information, ahead of our competitors, gives us an advantage. We also believe that the greater the number of inputs and data-points, the greater our ability to withstand market induced volatility. We strive to balance both while staying nimble and opportunistic.

As value investors, we have often been the first institutional investors in many small and mid-cap companies. Our research processes are intensive and we have found that walking that extra mile to be extremely rewarding. By focusing our efforts on Corporate Governance and management quality we have avoided many a pitfall of early investing. What distinguishes a successful investment from a failed one can be the resilience of a business model and patience. We understand and seek to master both. Small-cap and mid-caps stocks tend to be under-researched and relatively illiquid, but have the potential to deliver “super-normal” returns. It has been our experience that liquidity in our markets tends to be elastic and stocks tend to trade more once “discovered” by the market.